Your Business legal structure has many ramifications. It can determine how much liability your company faces during lawsuits. It can put up a barrier between your personal and business taxes – or ensure this barrier doesn’t exist. It can also determine how often your board of directors must file paperwork – or if you even need a board.
We’ll explore business legal structures and how to choose the right structure for your organization.
What is a legal structure?
A legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your legal structure determines your tax burden. On a state level, it can have liability ramifications.
Why is a legal structure important?
Choosing the right structure from the start is among the most crucial decisions you can make. Here are some factors to consider:
- Taxes: Sole proprietors, partnership owners and S corporation owners categorize their business income as personal income. C corporation income is business income separate from an owner’s personal income. Given the different tax rates for business and personal incomes, your structure choice can significantly impact your tax burden.
- Liability: Limited liability company (LLC) structures can protect your personal assets in the event of a lawsuit. That said, the federal government does not recognize LLC structures; they exist only on a state level. C corporations are a federal business structure that includes the liability protection of LLCs.
- Paperwork: Each legal structure has unique tax forms. Additionally, if you structure your company as a corporation, you’ll need to submit articles of incorporation and regularly file certain government reports. If you start a partnership and do business under a fictitious name, you’ll need to file special paperwork for that as well.
- Hierarchy: Corporations must have a board of directors. In certain states, this board must meet a certain number of times per year. Corporate hierarchies also prevent business closure if an owner transfers shares or exits the company, or when a founder dies. Other structures lack this closure protection.
- Registration: A legal structure is also a prerequisite for registering your in your state. You can’t apply for an employer identification number (EIN) or all your necessary licenses and permits without a structure.
- Fundraising: Your structure can also block you from raising funds in certain ways. For example, sole proprietorships generally can’t offer stocks. That right is primarily reserved for corporations.
- Potential consequences for choosing the wrong structure: Your initial choice of business structure is crucial, although you can change your structure in the future. However, changing your structure can be a disorganized, confusing process that can lead to tax consequences and the unintended dissolution of your.